Starting from short haul operation strategy, Air Asia airline in south-east Asia provides cost effective flying solutions for travelers. To formulate this cost effecting strategy, Air Asia first determine different cost such as capital, fixed, variable, maintenance, labor, fuel, facility, inventory, environment and technology cost to establish new point to point airline service. To investigate different kinds of cost Air Asia first identify potential market in south-east Asia by strong commitment at all level of services; for instance in safety, security, customer service and benefits. Air Asia also established their strategy by building strategic alliances with other airlines. This low cost strategy from Air Asia airline also proven to be formidable puzzle of interest as different proportion of constant changing variables affect on policy making, segmenting market, inventory control, yield system and so on. Basically, implementing such strategy was indeed complex in nature for example, providing direct services between two destinations route increase LOS (level of service) but on the contrary if the airline does not fill up with sufficient passenger then the airline surely will incur huge losses..
2 Different Cost Analysis of Air Asia:
2.1 Capital cost:
For Air Asia, capital cost is associated with initial setup of project, generally which occur at the beginning of project likewise, investment or buying airplane, cargo, aircraft, lands, buildings, construction, alternative route, high speed train (HST) facilities for different route and so on. Recently, Air Asia is going to expand its market in air cargo which again asking for lots of capital investment. Though, airline capital investments is highly intensive and most of the potential project failed due to limited funds. For example, MAXjet airways, EOS and SilverJet all failed at the initial stage of capital investment only because lack of funding and competitive business models (Wensveen, Leick, 2009). Thus, Air Asia is required to understand this issue for successful business require sufficient amount of capital investment at initial phase.
2.2 Fixed cost:
Here, the price of Air Asia has to be determined on capacity, seats and utilities to minimize total cost. In addition, fixed cost also consist of ticketing operation, ground facilities, airport counter facilities, forward booking and dispatching aircraft from the fleet which can be spread over more passenger as traffic density rises.
2.3 Variable cost:
These costs are determined based on operating, maintenance, labor, fuel, facility, inventory, environmental and technology cost.
3 Operating cost:
The effects of operating cost are un-quantified as the scope of system is varied on point to point service. Here the basic operating costs are administration, ticketing, sales & promotion, passenger service, en-route airport maintenance and landing cost. These operating costs have determined on the level of various operations on airline including air service such as cargo operation, employees.
3.1 Flight operating cost: Is typically associated with aircraft, fleet, flying operation as well as cost related to repairing of equipment and depreciation & amortization.
3.2 Ground operating costs: this cost incurred from handling airport station, landing fees, charges, processing cargo, passenger baggage, travel agency cost, retail ticket office, distribution, commission, reservation, ticket and sales and so on.
3.3 System operating cost: this cost include passenger service cost (i.e. foods, entertainment, flight attendant and in flight service and transport related cost (i.e. regional airline partners providing regional air service, extra baggage expense and miscellaneous overheads.
4 Maintenance Cost:
The next stage is maintenance cost which is related to engine maintenance and components maintenance cost. In 2009, the proportion of engine maintenance cost was 43 percent where component maintenance cost was 20 percent and line maintenance was 17 percent. The maintenance cost also increases due to direct operating cost as for daily air flight operation. Thus, maintenance cost is crucial for our Air Asia because this overhead cost doesn’t depend although it varies to the number of times due to requirement of service, demand or other factors. For example, any break down on engine or component hamper airline services for on time flight or even any disruptions increase additional charges as well as minimizing level of services which eventually drive away passenger.
5 Labor cost:
For Air Asia, labor cost is major factor as it is related with salary, benefits, pay rate for cabin crew, pilot, stuffs and other employees. However, labor cost also includes with aircraft services, cleaning, and passenger handling and catering. For example, providing service for customers likes catering, cleaning or even emergency service during flight require services from stuffs. For these additional services, employers expect to receive additional incentives.
6 Fuel cost:
Constant fluctuations on fuel price are also causes great impact on airline service in terms of competition on point to point service. This has been evident that approximately overall 20 percent operating costs are incurred from fuel, and due to price sensitivity, flexibility and quick responsiveness fuel price causes negative effect on ticket price.
7 Facility cost:
Here all kinds of aircraft, electricity, water, availability of spare equipments, machine, tools, ground maintenance filtering, pipeline and route maintenance costs are related to facility cost.
8 Environmental cost:
Airline industry is usually always remaining under pressure to decrease negative impact on global warming and noise pollution. Growing awareness on environmental issues is becoming a huge challenge now days to introduce new technology, aircraft and new air flight. For example, Singapore airlines attempted to keep its fleet as modern as possible. The new A380 is a cleaner and greener aircraft compared to the Boeing 747 on a per-seat basis but introducing such new service was really costly.
The only solution is to become greener and eco-friendly is adapting technology which doesn’t pollute air and doesn’t increase global warming. For example, eco-friendly gas could be an alternative solution to mitigate this issue as well as reducing costs. In Air Asia, it’s very important to forecast future environmental threats to sustain in market. This cost is hard to eliminate but since Air Asia is based on south-east Asia; rules and regulation are considerably favorable to sustain in market. On the other hand, it’s necessary to forecast estimating cost of environmental tax.
9 Technological costs:
Poor technology like traditional system i.e. manual ticketing, checking system, decrease significant amount of level of service. Though the cost are differentiate but to reduce substantial amount of cost for example, online booking, online assistance, and online information could be minimized by 24/7 online help line. For safety and security, RFID technology or 2D reader, barcode, e-service can be used.
To sum up, cost is always a major factor in all aspects like in marketing, operational, safety, technological, maintenance, environmental for Air Asia. Though cost is flexible in nature and complex but for Air Asia could easily switch their cost due differentiate their market and taking advantage on existing alliance. Here, Air Asia airline need to identify proportion of cost to invest at the right sector over the long period of time. As, the company is already offering 20 percent low flight than competitors; thus, it’s necessary to control cost with proper budgeting, planning and scheduling. In this case, Air Asia can also learn from Jet Asia and Singapore airlines, how these successful companies operate their cost-effective business to sustain in the market.